NFTs and Property Rights
NFTs (non-fungible tokens) are units of data stored on a decentralized digital ledger (blockchain). Unlike regular or fungible tokens, NFTs are distinguishable from each other and therefore unique.
What are NFTs used for?
NFTs are suitable for digital collectibles or artistic creations of all kinds. That’s unlike cryptocurrencies, which function as a medium of exchange, and are therefore exchangeable and divisible as units.
A NFT can be the digitized image of an original artwork or original digital art. Musicians and other artists can tokenize their works and offer them directly to consumers or sell them on NFT marketplaces.
Other potential use cases for NFTs include the gaming industry or the financial industry (DeFi). NFTs can also represent tangible objects such as real estate, where the underlying blockchain replaces a traditional land register by providing proof of ownership for real estate and related property rights. However, a legislative framework for this particular use case has yet to be adopted.
NFTs from a legal perspective
Given the vast number of potential use cases for tokenization, various legal questions arise depending on the scope of application.
For buyers of NFTs it is important to know what rights they acquire by buying a token. Typically, the original work will continue to exist alongside the NFT, be it in digital form (e.g. a tweet) or in the analog world (e.g. a painting). In this case, the NFT is just a copy of the creative content of the original, as such being a unique piece assigned to a specific owner. Such NFTs are like a signed copy of a book, for example.
When buying an NFT, the buyer typically only acquires the right to transfer the NFT to a third party but not the rights to the original work.
This means that the holder of the NFT is free to dispose of the token but would not be allowed to reproduce or otherwise exploit the underlying intellectual property.
Trading NFTs on marketplaces usually involves at least three parties, who may be located in three different countries, adding another layer of legal uncertainty. It should therefore be explicitly agreed upon which rights are transferred to the buyer of the NFT. This reduces the risk that the expectation of what has been bought does not correspond to the legal reality or that a NFT holder infringes intellectual property rights of the creator.
Clarifying the rights attached to the token and the property rights to the underlying object is important when tokenizing other assets too.
The transfer of a token representing a tangible asset does not automatically lead to the transfer of ownership of such asset. The transfer of movable property, for example, generally requires the transfer of physical possession according to Swiss law. When receiving the keys of a new car, one would typically become its legal owner. If access to an object can be controlled via a digital barrier (so-called smart property), the transfer of ownership could actually be attached to the token. As with intangible assets, however, it must be examined in each individual case which rights are transferred to the holder of a token and which ones remain with the original property owner.
If trading with tokens involves trading platforms or third-party marketplaces, regulatory questions also arise, and involved parties should particularly be aware of applicable financial market regulation.